Dupuis v. Federal Home Loan Mortg. Corp., Civ. No. 93-299-P-H.

• Decision Date: 09 January 1995
• Docket Number: Civ. No. 93-299-P-H.
• Citation: Dupuis v. Federal Home Loan Mortg. Corp., 879 F.Supp. 139 (D. Me. 1995)
• Parties: Margaret DUPUIS, Plaintiff, v. FEDERAL HOME LOAN MORTGAGE CORPORATION, Defendant.
• Court: U.S. District Court — District of Maine

879 F. Supp. 139

Margaret DUPUIS, Plaintiff, v. FEDERAL HOME LOAN MORTGAGE CORPORATION, Defendant.

Civ. No. 93-299-P-H.

United States District Court, D. Maine.

January 9, 1995.

COPYRIGHT MATERIAL OMITTED

Kurt E. Olafsen, Portland, ME, for plaintiff.

David J. Jones and Keith Jacques, Jensen, Baird, Gardner & Henry, Biddeford, ME, for defendant.

ORDER ON A STIPULATED RECORD

HORNBY, District Judge.

This case presents the always difficult question of which innocent party must bear the unavoidable consequences of a third party's wrongful acts. Fidelity Guarantee Mortgage Corporation ("Fidelity"), the original lender, caused much of the loss underlying this lawsuit. Fidelity, however, has been adjudged bankrupt and is judgment proof. The loss, therefore, must fall on one of the two innocent parties to this suit, the borrower Margaret Dupuis or the purchaser of her note and mortgage in the secondary market, Federal Home Loan Mortgage Corporation ("FHLMC").

The parties have stipulated the record for purposes of the liability issues in Dupuis's Complaint.

JURISDICTIONAL BASIS

The court has original jurisdiction of this matter. 12 U.S.C. § 1452(f) (creating original jurisdiction in federal district courts in all civil actions to which FHLMC is a party).

BACKGROUND

On July 30, 1990, Margaret Dupuis signed a promissory note to Fidelity for $156,000. She secured the note with a mortgage on her home. Dupuis intended to use the loan to repay creditors and finance a new addition to her home. At the closing or soon thereafter, Fidelity disbursed $115,152.44 of the loan to Dupuis or on her behalf. Fidelity and Dupuis agreed that Fidelity would hold $6,000 as a performance escrow and $1,601.88 for a tax and insurance escrow. Fidelity also held back $30,997.56, ostensibly for a home improvement escrow, only $6,000 of which was ever disbursed to Dupuis and $150 of which was disbursed to a private building inspector to inspect the Dupuis property. In fact, no written agreement ever established the escrow, and Fidelity's lawyer simply returned the money to Fidelity on October 10, 1990. Monthly payments were nevertheless calculated as if the entire loan had been paid to Dupuis. After intermittent periods of missed payments and makeups, Dupuis stopped making monthly payments in February, 1992.

On August 9, 1990, without notifying Dupuis, Fidelity assigned the note and mortgage to FHLMC as part of a bulk transfer of loans. FHLMC, in turn, contracted with Fidelity to service the note and mortgage pursuant to the terms of FHLMC's Sellers' and Servicers' Guide. Fidelity serviced the loan until the fall of 1992 when it filed for bankruptcy and ceased operations. Dupuis was unaware of the FHLMC assignment and servicing agreement until then.

Dupuis never received the remaining $24,847.56 home improvement "escrow" or the $6,000 performance escrow.

On occasion, Fidelity failed to pay Dupuis's homeowner's insurance premiums and real estate taxes from the tax and insurance escrow (sometimes but not always the escrow was insufficient) and consistently failed to pay Dupuis any interest on this escrow.

Fidelity persuaded Dupuis to pay a contractor $1,500 out of her own pocket to complete the roof on the addition and agreed to credit Dupuis's loan balance for that amount. Despite the agreement, Fidelity never credited Dupuis's account for the $1,500 she spent.

In July of 1991, vandals damaged Dupuis's swimming pool. In the fall of 1991, Dupuis received an insurance claim check of $5,458 for the damage. Dupuis signed the check over to Fidelity. Fidelity never credited Dupuis's loan for the amount of the check.

Fidelity's actions that Dupuis challenges were all unauthorized and improper under the Sellers' and Servicers' Guide.

On April 21 and May 11, 1993, FHLMC, through its new loan servicer, First Commercial Mortgage Company, notified Dupuis that her note was in default. FHLMC maintains that Dupuis must pay the full amount of the $156,000 note with interest and late charges, even though she never received over $30,000 of the loan and despite Fidelity's failure in servicing the loan to credit her with various items. As of September 22, 1994, the amount due under the note and mortgage, not considering any set-offs, was $223,542.95, with additional interest and late charges continuing to accrue.

Dupuis brought this lawsuit against FHLMC, and FHLMC counterclaimed to collect on the note and foreclose the mortgage.

My earlier summary judgment order left unresolved three counts, and part of a fourth, of Dupuis's Complaint. It is to these matters that I now turn.

BREACH OF CONTRACT (COUNT I)

The stipulated record contains five items that are clear breaches of contract: (1) Fidelity's failure to disburse the entire loan proceeds to Dupuis, (2) Fidelity's failure to pay Dupuis's homeowner's insurance premiums and real estate taxes from the fund escrowed for that purpose, (3) Fidelity's failure to pay interest on the escrowed funds, (4) Fidelity's failure to credit Dupuis's loan $5,458, the amount of the insurance claim check for the vandalized pool, and (5) Fidelity's failure to credit Dupuis's loan the amount she paid to close in the roof. FHLMC does not contend that these are not breaches. Instead, FHLMC argues that it has no responsibility or liability for Fidelity's wrongdoing.

Although the parties have not addressed choice of law, federal common law governs because of the important federal interests involved. See Federal Home Loan Mortgage Corp. v. Nazar, 100 B.R. 555, 557-58 (D.Kan.1989). The only other possibility is Maine law. Whichever law I apply, I reach the same conclusion. Under both federal common law and Maine law, the Restatement (Second) of Agency provides the governing principles because both the federal courts and the Maine Law Court regularly rely on the Restatements where, as here, no applicable precedents exist. See United States v. Gil, 657 F.2d 712, 715 (5th Cir. 1981); Bonk v. McPherson, 605 A.2d 74, 78 (Me.1992).

(a) Agency Principles

The parties agree that Dupuis had no knowledge that FHLMC owned her note and mortgage until after Fidelity's bankruptcy. Thus, the typical arguments in agency cases about "apparent authority" are inapplicable. See Libby v. Concord Gen. Mut. Ins. Co., 452 A.2d 979, 983 (Me.1982). So far as Dupuis was concerned, Fidelity had no "apparent authority" to act on FHLMC's behalf; to Dupuis's knowledge, Fidelity was all there was. At first glance, that might seem to end the matter. If Dupuis had no knowledge that FHLMC held her note and mortgage, why should she now have any recourse against FHLMC? Why not limit her recourse to (bankrupt) Fidelity? The question cannot be answered as easily as it is asked because FHLMC, for its part, is striving to hold Dupuis liable for amounts far beyond what Fidelity could have collected. It is FHLMC that wants to avoid the defenses and claims Dupuis would have if Fidelity were trying to collect on the note and foreclose the mortgage.

The Restatement (Second) of Agency announces: "A general agent for an undisclosed principal authorized to conduct transactions subject his principal to liability for acts done on his account, if usual or necessary in such transactions, although forbidden by the principal to do them." Restatement (Second) of Agency § 194 (1957).¹ A general agent is "an agent authorized to conduct a series of transactions involving a continuity of service." Id. § 3(1).

FHLMC was certainly undisclosed so far as Dupuis was concerned. It is pretty obvious, then, that, if Fidelity was a general agent for FHLMC, FHLMC is liable, as an undisclosed principal, for Dupuis's contract claims. All that Restatement section 194 requires in addition is that Fidelity have been authorized to conduct transactions and that Fidelity's actions done on FHLMC's account be "usual or necessary in such transactions." Section 194 makes clear that whether FHLMC authorized or prohibited the specific acts in question is irrelevant. FHLMC hired Fidelity to service loans and mortgages in accordance with the Sellers' and Servicers' Guide, including those of Dupuis. Thus, Fidelity was "authorized to conduct transactions" involved in such servicing. Although FHLMC points to provisions of its Guide which, it argues, prohibited Fidelity from treating the Dupuis loan the way it did, Fidelity's acts — done on FHLMC's account — were "usual or necessary" acts in a servicing relationship. That is true for the withholding of loan proceeds until the servicer is satisfied that the improvements have been suitably completed; the collection and payment of real estate tax and insurance obligations; the payment of interest on escrowed funds; dealing with a casualty loss on the secured premises and allocation of insurance proceeds for the loss; and negotiating with the borrower to improve the premises in exchange for a further disbursement or a credit against the loan due.

FHLMC argues that Fidelity was an independent contractor rather than an agent and has pointed to language in the Guide that servicers are only independent contractors. But that position misperceives the applicable law of agency. A principal/independent contractor relationship is to be distinguished from a master/servant relationship, but an independent contractor can still be an agent. Baker Bus Serv., Inc. v. Keith, 416 A.2d 727, 730 n. 2 (Me.1980); Restatement (Second) of Agency § 2(3). Lawyers appearing in court on behalf of a client are the classic example. See Nyer v. Carter, 367 A.2d 1375, 1378 (Me.1977). Plainly, Fidelity serviced this note and mortgage on behalf of FHLMC and in that respect acted as agent.² The real issue is whether Fidelity should be treated as a general agent. The Restatement gives two choices: "general agent," which I have already defined (and which produces liability for the undisclosed principal), and "special agent" — "an agent authorized to conduct a single transaction or a series...